Farmland values in the Midwest increased 16% over the past 12 months, matching the largest increase since 2007 and last exceeded in 1979 according to the Seventh Federal Reserve District. In the first quarter of 2011, farmland values rose 5%. Farmers have been encouraged to take advantage of high commodity prices by purchasing additional land and expanding operations.

The survey by the Federal Reserve Bank of Chicago found that there was more demand for farmland in the last six months ending March 2011 compared to the same period ending in March 2010. Farmers made up the majority of farmland buyers over the last six months, which is the typical farmland buying season. The number of farms sold, acreage sold, and the amount of farmland for sale all increased as well.

Illinois, Indiana, and Iowa had farmland value increases of 17%, 19%, and 20% respectively, over the past 12 months. Michigan and Wisconsin also had strong increases of farmland values of 11% and 9% respectively. Illinois and Indiana both had quarterly increases of farmland values of a lofty 8% in the first quarter of 2011.

Cash rental rates for agricultural land rose 16% over the last twelve months, which is the second largest behind 2008, since the District began tracking cash rents in 1981. 80% of all farmland rental contracts are cash rent contracts in the Seventh District, with the remaining 16% using crop shares and 4% on other arrangements.

Balance sheets of farmers have continued to improve as advancing agricultural fundamentals have reduced the demand for farm loans. The non-real-estate agricultural loan repayment rate marked its highest point since 2008. Additionally, the index of funds available to lend reached its highest point since 1987 although collateral requirements slightly increased and real estate loan interest rates began to increase, which are currently at an average of 5.8%.

Farmer income is positioned to rise to record levels in 2011 as the USDA estimated that input costs have increased only 9.4% year-over-year while corn prices have more than doubled. Survey respondents expect farmland values to continue to increase in the second quarter of 2011 along with farm machinery, grain storage construction, and real estate loan volumes.

The world’s gross agricultural output needs to increase by 3.4% to meet the growing demand primarily driven by emerging markets across the globe. The two primary ways to increase agricultural production are to either increase the amount of acres planted or increase productivity with technology.

Crop yields have been slowly increasing over time, with the largest increases due to the green revolution and the advancement of hybrid seed technology. Even with the past seed technology, crop yield increases are near 1.0% per year in the U.S while a considerable amount of farmland is being lost to development. Crop production must increase via either new technology or by expanding the amount of cropped land by bringing idle arable land into production.

Land to be Brought into Production

The ability to expand arable acres over the next 40 years will be difficult. The best areas for farming have already been identified and are being used for production. The incremental arable acres to be put into production will be on the periphery, with marginal growing conditions and transportation issues.

Presently, the growth of arable farmland has been flat as development of farmland in North America and Europe is offset by expansion in Africa and South America

There are roughly 1.5 billion hectares that are currently being farmed in the world. The FAO estimates that the world has a total of 2.5 billion hectares of “very suitable” or “suitable” for cultivation. 80% of the reserve land is located in Africa and South America.

Investment bank Credit Suisse estimates that only about 300,000 hectares of additional potential acreage, with the majority in Brazil and Indonesia. The table below summarizes the current and potential global arable hectares.

The primary expansion opportunity lies in Brazil, where the government organization Conab estimates there is an additional 106 million hectares available for agricultural development. The majority of this land is located in Brazil’s cerrado or high plains, a vast savannah in the central-western area of the country. The cerrado comprises of roughly a quarter of Brazil’s land.

Historically the soil was thought of as unfarmable due to the high acidity levels and lack of nutrients. New technologies that allowed farmers to improve soil fertility and a new type of soybean developed to grow in tropical climates allowed farmers to start producing crops in the early 1980s.

Today, the cerrado is Brazil’s most important soybean producing region and accounts for nearly all its growth in soybean production since 1980. Roughly half of the country’s corn and 90% of its cotton is also produced in the cerrado.

The primary issue expanding acreage in the cerrado is infrastructure as the majority of additional acres are located in Brazil’s cerrado, which is 1,500 kilometers from the nearest ports. Prices will need to rise substantially before the cerrado will be able add to global production.

Indonesia has substantial ability to expand acreage for palm oil cultivation. The Indonesian government estimates that it only using half of its land available for cultivation. In January, 2011, Indonesia targeted expanding the county’s agricultural land by two million hectares in the medium and long-term, although this plan his received much criticism as this would result in the removal of tropical forests.

Ukraine, Russia and Kazakhstan saw a substantial decline is arable hectares and crop yields following the decline in communism. The FAO estimates that arable hectares declined 11% between 2005 and 1992. Credit Suisse estimates that if arable hectares return to 1992 levels, this would add 1.9% to the total global arable acres.

Farmland set aside under the Conservation Reserve Program (CRP), could add to the amount of U.S. arable acres. At the end of 2010, 31.3 million acres were enrolled in the CRP in nearly 738,000 contracts according to the USDA. As the CRP contracts expire, much of this land may be put back into production, but a majority of this land is marginable at best, which is the primary reason it was put into the program in the first place.

Biotechnology Expansion

Although the amount of farmland is limited in the U.S. and in the world, farmland that is able to produce corn is expanding in the Midwest primarily due to biotech seeds. Several large seed and agrichemical companies such as Monsanto, Dupont (Pioneer), Dow Chemical, Syngenta, Bayer Crop Science, among others, have focused years of research and product development on higher performing varieties and hybrids of important food and feed crops.

While Genetically Modified Organisms (GMOs) are not without controversy and are essentially banned in Europe and Japan, in the U.S. better drought and cold tolerance has expanded the land area that can be used for cold sensitive crops. For instance, the land planted to both corn and soybeans over the past 15 years has expanded North (colder) and West (drier). The acreage allotted to corn and soybean production is expanding northwest to regions where growing degree days are in less numbers.

Biotech seed manufactures are currently developing the next generation of biotech traits that focus on greater productivity, improved nutrient use, disease resistance, plant density, and continued drought and cold tolerance.

All farmland that is planted with GMO corn requires a set percentage of the field to be planted with non-GMO corn, called refuge acres. The theory is to prevent pests and disease from becoming immune to the GMO traits that were developed to deter the pests and disease in the first place. Historically refuge acres must make up 20% of planted corn in the Corn Belt, but Monsanto’s Genuity SmartStax (DeKalb Brand) and VT Double Pro Corn seed allows for only 5% of the acreage to be planted as refuge, according to Monsanto.

On average, GMO corn will have higher yields than refuge corn thus any decrease in refuge acres should increase yields and boost the total production. It is the goal of seed manufacturers to continue to decrease the amount of mandatory refuge acres as well as supply refuge seed alongside GMO seed inside the same bag. Refuge in a bag seed corn may become the new staple for the American farmer very soon.

Nitrogen fertilizer is the largest fertilizer expense for corn farmers. Roughly $8 billion is spent on nitrogen by corn farmers each year in order to obtain maximum yields. Seed manufacturers Monsanto and DuPont are working on developing seed traits that are much more efficient with nitrogen use. The theory of efficient nitrogen use among corn would substantially cut down on the need for nitrogen and also maximize corn yields with less input costs.

Precision Farming

Precision farming is drastically changing the efficiency of the entire farming operation through new technology in machinery. Through information technologies, farmers are able to use variable fertilizer and nutrient applications, variable-rate seed populations, minimal tillage methods, and the time saving auto steer capabilities in new tractors.

Real Time Kinematic (RTK) Global Positioning Systems (GPS) are being used in many farm operations across the world. When paired with information technology, RTK GPS allows farmers to save on fertilizer costs, and most importantly, time. Farmers can take on information such as Cat Ion Exchange (CEC) levels from the soil and apply variable amount of fertilizer to accommodate the soil.

Precision farming has made way for strip tillage methods. Strip tilling is when a farmer using RTK GPS and computers tracks their progress within an inch of accuracy. Each year the rows of corn are shifted to the left or right by a few inches to make use of a new area of soil. This new designated strip will then receive the fertilizer and house the feed furrows for the next crop. Auto steer technology must be used with strip tilling for farmers to stay on the narrow strips each year. RTK GPS auto steers the tractor while tilling, fertilizing, planting, and harvesting.

Farmers are able to now use satellite imagery to map out their farmland while matching up grid soil samples and combine yield data within one-inch accuracy to determine the precise amount of fertilizer needed to replenish the soil for the next crop. The calculations can be done within the on board computer system inside the tractor. Varied amounts of fertilizer can be applied to save on money and time while maximizing yields.

Farmland lighter, sandier, soils can greatly benefit from variable seeding rates. The goal of farmers is to maximize yields from the available nutrient base while keeping input costs down. By cutting seed populations down from 35,000 seeds per acre to 15,000 seeds per acre on lighter soils, these plants will make use of the nutrients more efficiently by having less competition from each other which will create larger yields. Too high of a seed population will hurt yields. When using variable-rate seeding, the end result is less seed cost and higher yields.

Conclusion

The U.N estimates that global agriculture will need to produce more food in the next 50 years than what was produced during the previous 10,000 years, putting more and more pressure on future farmers and the land they use to produce our food.

Traditional farming methods cannot keep up with growing food demand, but increased planted acres, biotech development, and precision farming will ease some of the demand. Rising commodity prices and growing demand for food will continue to drive innovation and new technologies, but farmers have an uphill battle to solve the world’s food supply.

Today, the USDA released its weekly planting progress report. Corn planting made up important ground this past week, but is still significantly behind last year’s pace. With 27% of the crop being planted last week, 40% of the total corn crop is in the ground for the 18 primary producing states. This compares to a 5 year historical average of 59% in similar time periods, and 2010’s estimate of 80%. Wet weather patterns across much of the Corn Belt over the next week will undoubtedly play a major role in next week’s progress numbers.

7% of the U.S. corn crop has already emerged compared to the 5 year historical average of 21% by this point in the year. This week was the first week that USDA reported soybean planting progress with 7% of the crop already in the ground, compared to 28% in 2010 and the 5 year average of 17%.

The winter wheat crop condition worsened as more of the crop slipped grade this past week. Of the 2011 crop, only 33% is in excellent or good condition, compared to 66% one year ago. In 2010, 8% of the winter wheat crop was in poor or very poor condition while 42% is in such condition at this time in 2011. Winter wheat growth is still slightly ahead of schedule with 42% of the crop headed, compared to the 5 year historical average of 40%.

Cotton planting progress is at 26%, which is behind the 5 year average for the week of 33%. Spring wheat planting is still well behind the 5 year historical average with only 22% of the 2011 crop planted compared to the historical average of 61% by the second week in May.

Commodity prices were hurt this past week due to decreased global demand and favorable planting weather in the Corn Belt. Corn prices decreased 3.6% over the past week ending at $7.04 per bushel, soybeans were down 4.1% to $13.35 per bushel, and wheat ended the week unchanged, closing at $7.59 per bushel. Year-over-year corn prices are up 97%, soybeans are up 46%, and wheat is up 57%. Next week, we will look forward to reporting USDA estimates of emerged soybeans and spring wheat along with the usual planting progress.

Just like humans, crops need to be healthy in order to yield their maximum potential. The application of fertilizer helps keep plants strong and healthy by providing nutrients to a plant throughout its life. The three macronutrients that are essential for plant growth, especially in corn, soybeans, and wheat, are nitrogen, phosphorus, and potassium. Micronutrients are also very important in order to obtain high yields, but a much smaller amount by volume is needed in soil.

In order to feed the growing world population, gross crop output needs to increase by 3.4% over the next 10 years, and the primary way to achieve this goal is through higher crop yields. Fertilizers will play a key role in increasing global agricultural output and application rates and demand will be driven by the world’s rising population.

Nitrogen

Derived from natural gas, nitrogen is the most widely used fertilizer in agriculture by volume. Grass crops, including corn and wheat, require large amounts of nitrogen to obtain optimal yields. Plants with nitrogen deficiency can often be seen by their yellowing of the inside of their leaves.

There are three different ways that a farmer may chose to apply nitrogen. The first, and most common, is the dry application of urea nitrogen which is 46% nitrogen by weight. Urea is applied through broadcast application, but can convert to ammonia or nitrate in a short amount of time that will evaporate and leech out of the soil. An ample amount of rainfall is needed after urea is applied to be absorbed by the soil, otherwise the farmland will have to be tilled to work the urea into the soil to prevent leeching.

The second type of nitrogen fertilizer is liquid form which is often either 28% or 32% nitrogen by weight. The key difference is freezing temperatures. 32% liquid nitrogen is primarily used in southern states while northern states require 28% liquid nitrogen because its freezing point is lower, but the concentration of nitrogen is also lower. Liquid nitrogen is usually applied by banding it with other chemicals and herbicides to save on diesel costs.

The final form of nitrogen is the gas form; anhydrous ammonia. This gas is dangerous to work with, but anhydrous ammonia is usually cheaper than other nitrogen forms and the gas will not leech out of the soil as much as other forms of nitrogen. If farmers have the opportunity to apply nitrogen in fall, anhydrous ammonia is often the form of choice because it will not disappear by spring.

Crop rotation is taken into consideration when applying nitrogen since certain crops require more nitrogen than others. The more crop residue that is on the soil surface, the more nitrogen is needed to help break down the carbon by promoting bacteria growth. Farmers will need to apply 0.9 lbs of nitrogen per bushel of anticipated corn yield, if corn is planted after a previous soybean season. If corn is planted after a previous corn season, 1.2 lbs of nitrogen per bushel of anticipated corn yield will be required. For example, if 200 bushel per acre corn yield is anticipated for this coming year and the field had soybeans in it last year, 180lbs of nitrogen must be applied per acre.

Phosphorus

Critical to the photosynthesis process of plants, phosphorus helps speed up crop maturity and helps overall plant health. Healthy crops will be less susceptible to disease and able to produce optimal yields. The nutrient is surface mined with 80% of the production coming from the U.S., China, Morocco, Russia, and Tunisia.

Phosphorus can be present in two different forms in soil; either available or unavailable. Unavailable phosphorus is phosphorus that is in the soil, but currently bonded to other elements forming compounds that do not allow the phosphorus to be able to be used by plants until the chemical bonds deteriorate. Available phosphorus is unbounded and can be consumed by plants. To create more available phosphorus when applying fertilizer, farmers will often band phosphorus with specific chemicals that bond to the phosphorus, but only temporarily, allowing the element to become available quickly after application.

Phosphorus is applied by either broadcasting solid phosphorus rock on to a field, or injecting it in the soil subsurface. Farmers typically apply phosphorus every two years since the nutrient only moves a couple inches in the soil per year. The mineralization of organic soil matter will also naturally create phosphorus, but typically is not enough to sustain required crop yields. Corn that has low phosphorus levels will often have purple colored leaves and can be seen from a distance.

Potassium

The third macronutrient that is vital in crop production is potassium, which adds strength to a plant’s stalk and root system. A plant’s internal workings are greatly affected by the amount of potassium that is available to it. Potassium will remain in the soils for up to three years after application.

The growing cost of fertilizer has been taking a toll on U.S. farmland that requires potassium. In a field study conducted by Ag PhD, 40% of northern U.S. farm fields were deficient in potassium in 2004 and 75% were deficient in 2008. Crops deficient in potassium will show yellowing of the outside of the leaves.

Potassium can be applied in two different forms. The dry form, called potash, is broadcast applied but requires a few months to breakdown in to the soil. Farmers often select potash because it consists of potassium and chlorine. Potassium hydroxide, the liquid form, is typically blended with other liquid nutrition and is immediately available for plants growth.

Micronutrients

Micronutrients, or trace elements, are essential in crop production however the amount needed for optimum nutrition is very small. Micronutrients are just as important to crop production as the major nutrients because with a deficiency in just one micronutrient, major yield loss can occur.

There are seven primary micronutrients essential to plant growth that include manganese, boron, copper, iron, chlorine, molybdenum, and zinc. The difficult issue is the ratio at which each micronutrient is needed as too much or too little of any micronutrient can hurt yields. Blended micronutrient products have come on the market to help solve this issue of varying application.

Micronutrients are often applied in the liquid form in the seed furrow during planting or in solid form by broadcast application. Micronutrients do not vacate the top couple inches of soil, which leaves them susceptible to washing away from the top of hills. Farmers will use soil tests to monitor the micronutrient levels every few years.

Outlook

Fertilizer comes in a wide variety of forms allowing a farmer to choose whichever the optimal mixture for their needs. Different forms of fertilizer will carry different prices leaving farmers to calculate the ideal level of nutrients for plant growth, but still allowing them to be profitable.

Although expensive, fertilizer is absolutely essential for increasing crop yields across the world. Farmland is often thought as the input that cannot be substituted, but fertilizer is nearly just as important.

Today, the USDA released its weekly planting progress report. Corn planting progress is very behind last year’s outstanding pace, with only 4% of the crop being planted last week, 13% of the total corn crop is in the ground for the 18 primary producing states. This compares to a 5 year historical average of 40% in similar time periods, and 2010’s estimate of 66%. Top corn producing states Illinois, Indiana, Kentucky, North Dakota, and Ohio all reported no progress in corn planting over the past week due to the record amounts of precipitation.

The winter wheat crop condition continues to worsen as more of the crop slipped grade this past week. Of the 2011 crop, only 34% is in excellent or good condition, compared to 68% one year ago. In 2010, 7% of the winter wheat crop was in poor or very poor condition while 41% is in such condition at this time in 2011. Winter wheat growth is ahead of schedule with 33% of the crop already headed, compared to the 5 year historical average of 29%.

Cotton planting progress is at 18%, which is slightly behind the 5 year average for the week of 24%. Spring wheat planting is still well behind the 5 year historical average with only 10% of the 2011 crop planted compared to the historical average of 43% by the first week in May.

Corn prices decreased 4.4% over the past week ending at $7.30 per bushel, soybeans were up 0.1% to $13.90 per bushel, and wheat ended the week down 8.8%, closing at $7.59 per bushel. Year-over-year corn prices are up 99%, soybeans are up 41%, and wheat is up 55%. Next week, we will look forward to reporting USDA estimates of planted soybeans along with the usual planting progress.

Record levels of precipitation have been recorded across much of the U.S. Corn Belt delaying the planting season for the corn crop. As of Monday, April 25th, only 9% of the entire U.S. corn crop had been planted, compared to 46% in 2010 and the 5-year historical average of 23%. The weather outlook for the next few weeks should provide relief to wet areas and moisture to the dry wheat regions in the southern plains.

Grain Prices

Corn prices increased by 8.8% this month and closed at $7.54 per bushel due to the poor planting reports by USDA. Corn for May delivery was up as much as 12% earlier in the month on the very wet and cold weather in the Midwest, but decreased foreign demand pressured prices. U.S. exports of corn fell 43% during the last week of April compared to the prior week, and 65% off of the 4-week running average due to high prices and concerns over increased supplies. In addition, reports of investment fund capital exiting the grain markets on speculation of unsustainable prices lead to a selloff in late April.

Soybean prices decreased by 1.3% in March, to $13.92 per bushel due to decreased demand both domestically and overseas. Soybeans are planted after the corn crop and weather concerns have not yet carried over into the soybean markets. Soybean prices have also followed the general trend in the grain markets throughout the month.

Wheat prices increased this month to $7.69 per bushel, a 0.8% increase. In early April, wheat prices were as high as $7.97 per bushel due to the bullish USDA Acreage Report released in late March, but improving weather and decreased demand have pressured wheat prices lower. Although the condition of the U.S. wheat crop is dreadful, wheat conditions have been improving in the FSU and EU. Global wheat prices may see a relief this summer as Russia’s export ban on wheat may be lifted as soon as July, according to recent reports.

WASDE

The USDA’s April update of balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates (WASDE) report did not carry any alarming information as corn and soybean ending stocks remained unchanged.

Corn used for ethanol was increased to a record 5 billion bushels of corn, but the increase was offset in feed and residual use domestically. The current stocks to use ratio sits at an extremely tight 5%, which equates to an 18 day supply of corn.

Reports of an increased soybean crop in Brazil lowered U.S. soybean exports by 10 million bushels, yet the average market price for soybeans for 2010/11 was increased by 35 cents by USDA. Wheat stocks fell by 4 million bushels due to the increase in wheat acreage planted, although analysts were expecting wheat stocks to increase.

Weather & Planting

An extremely wet and cold April has severely delayed corn planting in the Corn Belt. As of April 25th, only 9% of the U.S. corn crop has been planted compared to the 5-year historical average of 23%. Spring wheat planting has also been delayed as only 6% of the crop had been planted as of April 25th, compared to the 5-year historical average of 25%.

Dry weather has continued to deteriorate the condition of the winter wheat crop in the central and southern plains throughout April. As of April 25th, 40% of the crop was considered to be in poor, or very poor condition compared to only 6% last year. Only 35% of the winter wheat crop was classified to be in good or excellent condition while 69% was in 2010.

The La Nina weather pattern is greatly affecting the precipitation levels across the entire nation. In comparison, Wichita, Kansas has recorded only 1.45” of rain in April, which is 77% below the average for the month. Champaign, Illinois has received 6.90” of rain, 89% higher than the average for the month of April, according to The Weather Channel. Upwards of 112% of the normal rainfall has been recorded in Indianapolis, Indiana during the month as well.

Farmland

Farmland prices continue to see record sales as the Rural Mainstreet farmland index remained above growth neutral for the 15th straight month. The farmland index increased to 77.6 from March’s 75.0 and well above last April’s 59.6. Bankers continue to expect strong farming conditions, but are concerned about rising crop expenses.

The typical farmland selling season extends from when crops are harvested in fall until the spring crop is planted. Farmland sales have been slowing down due the upcoming planting season, but high prices have been continuing to motivate potential sellers.

Outlook

The weather has been the driving force behind the grain markets in April and has also been to blame for the poor planting season thus far. Besides the delay in actual planting caused by the wet weather in the Corn Belt, any spring field work has been pushed back as well. Fields are inaccessible when wet and the physical planting dates for some farmers could be even further delayed if spring tillage and fertilizer application has yet to be completed.

The weather forecast for the Corn Belt has begun to call for much drier weather that may relieve high crop prices and farmer concerns. We expect crop prices to follow weather patterns if the macroeconomic pressure remains unchanged.

Grain markets will focus their attention on the weekly USDA planting progress reports, weather conditions, and growth stages moving forward into May. Weather will continue to play an enormous role in the grain markets through the rest of the season as well.